Mixed Decision on Integrity Rules

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The primary for-profit-college trade group notched a minor court victory Tuesday in its legal challenge to aspects of the U.S. Education Department’s recently strengthened “program integrity” rules. However, the bulk of those rules will stand.

The Association of Private Sector Colleges and Universities had filed a lawsuit over three of a dozen or so rules the department tightened in 2010, asking the court to strike down regulations relating to incentive compensation for student recruiters, misleading marketing and state authorization of colleges.

Last summer a federal court upheld the department’s rules with one major exception, siding with the association in its opposition to the extension of state authorization requirements to online programs, which would have required colleges to meet state requirements everywhere they enroll at least one student. Both sides appealed.

The U.S. Court of Appeals for the District of Columbia Circuit backed the online ruling from the lower court with its decision this week. And, in perhaps the biggest win for the association, the court ruled that aspects of the "misrepresentation" regulations on marketing represented an overreach by the department, and sent them back for the inclusion of protections and clarification. The court mostly agreed with the previous ruling on incentive compensation, requesting only minor clarifications.

The department is pleased that the court largely upheld the strengthened rules, which were put in place to protect taxpayers and students, said Justin Hamilton, a spokesman for the department.

“The court did take issue with certain aspects of our regulations, and we're evaluating the appropriate next steps there,” Hamilton said in a written statement. “On balance, the decision paints a very positive picture of our work and highlights why these regulations were needed.”

Not surprisingly, the for-profit association had a different take.

“The decision grants significant relief to APSCU’s members and the regulated community, and students will benefit,” Steve Gunderson, the association’s president and CEO, said in a written statement.

The for-profit group is also fighting the department’s gainful employment regulations in a separate lawsuit, which has yet to be decided. Teddy Downey, a financial analyst who often has a bearish view on for-profit higher education, cautioned against using the court’s decision Tuesday as a prognosis for the gainful employment lawsuit’s chances. But the court “was more concerned with process fixes as opposed to substantive changes,” he said, which might bode well for the department on gainful employment.

Many traditional colleges also don’t like the state authorization rules. So in a sense, the for-profit group’s win on the online education issue is good for nonprofit colleges that have a heavy online presence. And some nonprofit colleges had concerns about the misrepresentation changes as well. But no traditional higher education associations signed on to the for-profit group's lawsuit.

The department’s previous standard for misrepresentation prohibited colleges from making “false, erroneous or misleading” statements to current or prospective students. That rule was extended to third parties that provide services to colleges, including marketing companies. It also added the general public to those who colleges are banned from misleading, and expanded the definition of what constitutes a misrepresentation.

“A misleading statement includes any statement that has the likelihood or tendency to deceive or confuse,” according to the new rules. “A statement is any communication made in writing, visually, orally, or through other means.”

The for-profit association last year issued its own strengthened guidelines on misrepresentation, pushing for its members to scrutinize advertising practices of “lead generator” contractors. The complex guidelines sought to get ahead of the rules and make sure for-profits did not run afoul of them by paying for ads like the oft-criticized example of the TV commercial featuring a young woman taking online classes in her underwear.

The court found that the new misrepresentation rules clearly serve a purpose, by “ensuring that schools receiving federal funds do not deceive prospective students into accepting loans that they cannot repay.” But it decided that the rules were confusing in places and exceeded the department’s authority, by extending to areas that are not covered by the federal Higher Education Act.

As for the incentive compensation rules, the court asked the department to better explain how it reached part of its decision, and to address some concerns commenters had submitted, which “will be a simple matter.”